Advantage VAD
By K R Nambiar
 Over the last few months there has been much interest in the emerging business model of value added distribution (VAD). The South Africa-based Datatec Group picked up a 50.01 percent stake in Bangalore-based Inflow Technologies. Westcon Group, another Datatec venture, is entering the Indian market, possibly in a few weeks. It is also expected that by the end of the financial year Comstor, yet another Datatec company, will be setting up a base on Indian shores. Bangalore-based iValue InfoSolutions, a five-month-old start-up which received seed funding from Singapore-based EGuardian, an IT security products distribution vendor, is expected to announce another round of funding shortly.
There’s more. The $17.95 billion Avnet Electronics acquired Indian system integrator Ontrack Solutions, and is planning more acquisitions to set up its VAD business in the country. Earlier, M.Tech, another Singapore-based vendor, launched a joint venture with Ahmedabad-based Virtual NetComm, and is slowly trying to gain further marketshare in the country. Meanwhile, rumor mills are chugging that Arrow Electronics’ VAD group, Arrow Enterprise Consulting Services, is eyeing the lucrative Indian market, and will make an entry here sometime next year. In addition there are organizations such as Transition Systems and the Mumbai-based Round Robin Technologies which have established themselves as niche players in the space.
VAD as a business model has been around globally for nearly a decade, but it has changed drastically over the past few years mainly because of two reasons.
“Some of the vendors have started expecting the distributors to play the role of managers of their extended channels. This is true even of companies such as Cisco, but the small niche vendors who are specialized in areas such as security have the biggest need for distributors who can add value,” explains Prabhakar Kini, managing director of Kinfotech, a solutions provider focused on the security marketplace.
While commoditized industry vendors such as Intel, Microsoft, IBM and HP prefer to manage, support and grow their channels on their own, smaller niche players such as Array Networks cannot really afford to do the same. “We are quite a niche player, and know that we cannot realistically address more than 60 or 70 resellers in India. Our products require a lot of expertise to sell and support, and we require a distributor who can manage the logistics, educate channel partners and help them take our products to end-users,” explains Bhanu Panda, vice president of Array. “That’s why we were happy to sign up with an iValue rather than chase an Ingram Micro.”
The second reason is the dramatic change that the technology landscape witnesses month after month as new technologies arrive. “There is a big gap between vendors, resellers and end-users, and there is a need for technology enablers who can bridge this gap. VAD is a very generic term that has been used to describe the business model,” says Sriram S, chief executive of iValue. “We are essentially trying to map enterprise customer requirements to best-of-breed vendor solutions, and then enable a channel partner to deploy the solutions.”
This role is in contrast to that of a mainstream distributor—as a wholesaler of vendors’ products where the vendors manage the channel relationship. While mainstream distributors focus on logistics, credit management, fulfillment and (sometimes) grass-root implementation of channel programs drawn up by the vendor, value added distributors (VADs) go beyond and ‘own’ the channels for their vendors.
Says Byju Pillai, CEO of Inflow: “Typically, VADs are expected to be involved in every aspect of channel development. A company such as ours takes care of product marketing, channel development, pre-sales consulting, post-sales support and deployment, promotions and even educating end-users on behalf of the vendor.”
Most VADs operating in the country are focused on one or more of three areas—networking, security and storage. “These are the three segments which are growing well above the standard industry growth rates, and most resellers require support on all aspects of a business transaction in these areas. There are cases where we take care of every aspect from preparing the specs to logistics to deployment and support, leaving the partner to merely handle the transaction,” says Sunil Pillai, chief operating officer and founder of iValue. Others point out that value addition can only be possible for products that require value addition.
Gopalan Balakrishnan, managing director, Avnet Technology Solutions, Avnet India, explains his company’s position. “Avnet worldwide is only into VAD. It does not distribute any product to which it cannot do a value-add for the partner or vendor or both. In other words, we are not in the space of desktops, laptops, printers, consumables, software licenses, etc.”
Almost all the VADs essentially follow the same business model. All of them engage directly with enterprise customers and map their requirements, then work with vendors for apt solutions, then connect with partners who take the solution to the market. “We have somewhere around 3,800 end-user enterprises on our radar, and we are working with around 400 resellers across the country. Our approach is very customer-centric, and we even leave to the customer the choice of the system integrator who will complete the transaction,” explains Sriram.
Pillai of Inflow puts the number of reseller partners they engage with at around 200. “We generally work with the top 200 SIs/SPs, but this does not mean that we ignore opportunities from other partners. However, we have seen that most of the business generated in areas such as security and storage are handled by the top 200 SIs.”
Money matters
“The sudden interest shown by global players in the Indian market is both because of the global slowdown as well as because the Indian market looks more robust. However, the fact remains that the business model is quite sound, is scalable, and ensures reasonable profits for committed players,” states Sriram.
Informs Rajendra Shah, MD of M-Virtual Technology India, the JV between M.Tech and Shah’s own Virtual Netcomm: “We have currently aligned with just two vendors, Citrix and Checkpoint, and operate with around 30 people in four cities across India. Like any other distributor, we sell strictly through partners and buy only from the vendors. Our turnover is not substantial compared to the large national distributors, but we are fairly profitable.”
The secret behind the profitability? According to Shah, M-Virtual also sells services through their channels. “The real value addition is going beyond the usual services—such as channel enablement or pre-sales consulting—that you render for vendors as well as partners. Go beyond and offer services that bond the customers as well as partners with your company.”
Unlike the normal distribution channel, which also sells deployment and support services from vendors, VADs in the country also sell customized services. “We go further and offer support solutions that are specific for customers. For example, we have customers who expect service level agreements which speak of uptime for a product for four or even two business hours. Depending on factors such as the proximity of our support offices to the customer, we actually offer such services. Resellers who work with the customers also benefit from such transactions,” says Pillai of iValue.
Apart from new distributors entering the space, even established distributors such as Redington and Ingram Micro have groups which are focused on the enterprise business, and which provide some of the value additions offered by organizations such as iValue and Inflow. Says Pillai of Inflow, “Both the large national distributors have focused teams to help partners work better with large enterprises. However, we do not think they are value adding to the extent we are.”
Since the base of most VADs is small as of today, most are predicting three-digit growth rates. That aside, VADs are also expecting healthy growth rates because of the faster growth rates of the segments they address. “Plus there are a number of new vendors entering the space, and there is also vendor consolidation happening, which means that a vendor who probably would not have been available in the Indian market earlier is now available because the vendor has been acquired,” observes Inflow’s Pillai.
Looking ahead
Many in the industry feel that the future of distribution lies in value addition. Observes Rajesh Goenka, vice president for sales and marketing at Rashi Peripherals, “We feel that in future only VAD will survive. The normal distribution business will be consolidated among just a few distributors. It is clear that henceforth, without value addition, growth in the distribution business will be difficult.”
Shah of M.Tech feels that the expertise of Indian VADs should help them move beyond the country and look at markets across the globe. “At the end of the day, VAD requires good quality manpower which is available here. We recognized this strength and have already entered the Middle East market. Even vendors are pushing us to enter new markets.”
Adds Balakrishnan of Avnet, “Increasingly, vendors have started realizing that channel management and development can be entrusted to the right partners. In addition, distributors such as us can do better justice to both vendors as well as partners since we will be working with only a few of them, unlike others who focus on a run-rate model.”
While most VADs are currently not engaging with mainstream vendors such as HP or Sun, some feel they might be roped in by the mainstream too. “Though we have not approached any of the server/workstation vendors, there could be interest as almost everyone is looking at new ways to increase their marketshare,” notes Pillai of Inflow. Meanwhile, some of the VADs have started thinking beyond security, networking and storage.
“I think the next wave will be on distributing enterprise applications. We see huge potential for such applications since we work closely with enterprises,” he adds. |